Indemnification

A legal term that means one party agrees to compensate another party for loss or damage that has already occurred, or guarantees, through a contractual agreement, to repay another party for loss or damage that occurs in the future. Indemnification clauses are common in corporations and LLCs. Often a company will agree to indemnify its shareholders, members, officers, and directors for actions they take in such roles on behalf of the company. In order to attract new investors in a startup, a common agreement that investors will demand is an indemnification agreement. This agreement essentially assures that, unless the investor does something intentionally wrong or with the purpose of harming the company, that the company will pay for any damages that result from that person’s actions. It’s a way of providing additional security the investor that, particularly if the investor will take on a role as a director or officer of the company, the investor will have assurance that he or she will be exposed to less risk in such role. Indemnification clauses are also common in acquisitions where buyers of businesses ask sellers to pay for any preexisting liabilities, particularly if those liabilities arise after the close of the transaction but related to events that occurred prior to the transaction closing.